Don Chamberlin's Financial Services Blog

Category: Small Business

Is there such a thing as a proven method that can predict if a new business idea is any good with 100 percent accuracy? No. Investing in business ideas comes with inherent risk. That said, there are ways to mitigate that risk.

One of those ways is by studying the market – its needs, its flows, its history. Keep in mind though that if your idea is truly innovative, you won’t have anything truly comparable to juxtapose it to, which can mean great things for your idea but bad things for predictability.

One great example of this is Airbnb, a company currently valued at 10 billion dollars with 1.5 million listings all over the world. When Airbnb’s CEO Brian Chesky and his partners were starting out back in 2008, they were proposing a brand new idea: create an online platform where homeowners could offer their homes to strangers looking to stay the night for an affordable nightly fee. For some VC companies, Airbnb’s proposal was innovative and promising (profit wise), but for others the proposal seemed too risky (who would let potential serial killers into their house?) and doomed for failure. The line between genius and insanity is pretty thin, and the outcome for an idea like this seemed impossible to predict at the time.

Fortunately, things worked out in Airbnb’s favor, but all over the world, startups like Airbnb go through a similar process where investors simply can’t determine the probability of success.

Pian Shu, an Assistant Professor and member of the Technology and Operations Management unit at Harvard Business School, and her colleagues decided to try to tackle this problem in a new study.

Shu and her co-author Erin Scott from the National University of Singapore used the MIT Venture Mentoring Service (MIT VMS), a program that connects first-time entrepreneurs to successful businesspeople to develop their ideas. When an entrepreneur first applies to the program, a staff member writes up a short description of their business idea in a uniform format and circulates it amongst a pool of more than 100 mentors. Shu and Scott realized that they could compare the number of mentors expressing interest in an idea to the eventual success of that idea, hence discovering if there is in fact a formula that determined if the amount of interest in the idea has anything to do with predicting that idea’s true potential for success.

The first thing they noticed was that the mentors in the program had an uncanny ability to predict successful ideas. Numbers wise, the average venture idea attracted interest from about 6 mentors, while a venture that attracted twice as much interest was 27% more likely to commercialize (the researchers defined commercialization as having multiple repeated sales, an Amazon storefront, technology licensing, and others similar measures of success).

Another thing Shu and her researchers noticed was that the predictability of success was also determined by the industry of the proposed idea. For example, ideas associated with sectors that were R&D (research and development) intensive, such as such as energy, hardware, medical devices, and pharmaceuticals were more predictive than ideas associated with non-R&D intensive ventures like mobile, apps, and software.

Lastly, Shu’s team was surprised to discover that the evaluators of these businesses were no better at predicting the success of ideas within their industry of expertise than they were of those ideas outside their industry of expertise. By no means does this mean that expertise in a certain field is not useful, but it should encourage us to discuss our business ideas with successful entrepreneurs in general, and not just ones within our own niche. In fact, an “outsiders” perspective could benefit the evaluation process on the whole.

While Shu and her colleagues weren’t able to come up with a simple formula for predicting success, they were able to identify these useful guidelines anyone can use when determining whether or not their latest business idea is worth fighting for and/or investing in.